Business

4 Main Questions Startups Need To Ask Themselves Before Approaching Angel Investors

You have a brilliant idea, but you don’t have enough (or no) funds to work on it fully.  While angel investing is one of the methods for you to get funded, the question is – Do you have what it takes to attract an investor and to successfully pitch your idea? Here are 4 important questions for you to ponder upon, before approaching an angel.

  • Is your management team credible and likeable?

    Multi-ethnic superhero businessmen.

The portfolio of the individuals behind the business can be much more important than the idea itself. It’s nothing personal, but experienced investors know that it’s the determination and resourcefulness of the team that gets a business through the hard times. So, if you have a killer team,that means you have a great start.

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Other than that, it would be better if the investors know you personally. The getting-to-know-you phase would help in the long run and  they are likely to feel much more comfortable investing in your business.

This is also important for the business’ stability.  Since the investor may hold the bigger portion of your company, they have the right to replace you if they feel you’re not fit to run it.         

In case you’re wondering about how to find good people for your team or build a rapport with potential investors, the answer would be in networking. Check who’s already in your contact list and attend as many valuable networking events as possible. In addition, get in touch with your local startup community to know when the next event, workshop and conference is.

 

  • Do You Have A Clear and Complete Business Plan?

 

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Investors would be more confident to sign the cheque when they have all the information they need about your company and products.  This will determine whether they should consider investing in your startup in the first place. Without a proper business plan, your company is likely to go on the path of failing to get any monetary help.

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In your business plan, it’s essential to include everything that you think the investors would like to know – The problem that has been solved, the business model, market behaviour, your competitors and the advantages of having you in the market, as well as how will you be profitable.

Additionally, analyse your business through market research and surveys, so that you can have more insights. If you ever get stuck, don’t be afraid to ask for your mentor or partner’s help.

  • What is your business scalability?

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You don’t have to have a global presence to get a positive cash flow from the start. However, your business and revenue model must have the possibility of expanding in the future.

Take a look at your burning capital (the initial funding amount spent per month to finance overheads, before generating positive cash flows), CAC (Customer Acquisition Cost), customer repeat rate and also conversion rates. These are some of the parameters angels would be interested in.

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If there is a need to increase fixed cost in order to increase sales, then this might hamper the bottom line of getting funded. Maybe it’s time to rethink and revise your strategy again. Easily scalable ideas usually catch the attention of investors more.

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Angel investors do like to work with exciting new startups and share their expertise. But, they also want to invest in a company with the potential of delivering good returns.

  • Do you have a believable exit strategy?

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The only way the angels make money with what has been invested is when they can sell their share of ownership for money; which is what they call the exit. If you think that it’s too early to be thinking about it – you’re wrong.

C.J Fitzgerald, Managing Director of Summit Partners, a growth equity firm said, “Most entrepreneurs over time should start to think about a future exit strategy because preparing for an exit takes some time…. Most of those options (exit strategy) take some forethought and preparation.”

The range of exit strategies includes taking the company public through an initial public offering (IPO), selling the company to a strategic acquirer, or recapitalising and selling the firm to the management team, also known as a management buyout.

What To Consider When Choosing An Exit Strategy

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  1. Consider your future role in the business

A strategic acquisition can be an excellent solution for companies that are struggling with succession-planning issues, while an IPO or a management buyout will work more effectively for teams that want to stay in charge.

  1. Evaluate your liquidity needs

In an IPO, your shares will likely be subject to a share lock-up agreement, which means you will not be able to sell your shares for a period of time. A strategic acquisition will often generate an immediate cash payment, which will increase the owner’s liquidity. However, sometimes the final price is not determined until the end of an earn-out period, which can last for several years. Meanwhile, in a management buyout, the original owners will generally receive liquidity over a period of time.

  1. Think about your company’s future potential.

An IPO will allow you to keep a substantial interest in the company, and to time the ultimate disposition of your shares. Management buyout, on the other hand, will allow continuous participation in a company’s growth. However, an acquisition will generally eliminate, or at least greatly reduce, your ownership interest in your company, as well as your ability to influence its future direction and performance.

  1. Assess market conditions

Talk to any commercial lenders, investment bankers, or other financial professionals, about trends in the marketplace. By doing so, you’ll able to know what your business is worth.
In a nutshell, keep these questions in mind, if and when you’re pursuing angel investors. If you have any additional tips and experiences with angel investors, do share with us.

 

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